Sovereign Bailouts and Senior Loans
30 Pages Posted: 20 Apr 2016
Date Written: August 1, 2012
Institutional lending in crisis is evaluated from a theoretical point of view. First, the share of senior loans in new loans is irrelevant under a given probability distribution of the country's resources. Second, seniority may partially alleviate the inefficiency of debt contracts when the distribution of resources is endogenous to the country's physical investment and effort towards success. Third, with multiple lending rate equilibria, institutional lending may induce a switch to a lower private loan rate if it can be done in a sufficiently large amount. Fourth, conditions are analyzed under which debt forgiveness is efficient under a financial shock.
Keywords: Debt Markets, Bankruptcy and Resolution of Financial Distress, Economic Theory & Research, Financial Intermediation, External Debt
Suggested Citation: Suggested Citation